Unless you’ve been living under a rock you probably have heard about the hype and hyperbola around GameStop stock mania. Post’s on how this situation unfolded are a dime a dozen, so I’m not going to rehash that more then a bare minimum. No I really want to talk more about mania stocks, play stocks, and the large portfolio.
A Brief Intro to Meme/ Mania Stocks: GameStop
A detailed introduction of the GameStop situation can be found here. In essence the stock took off in price with an expectation to continue to do so for a few days. Going from 4 dollars a share at one point all the way to 400. The other side of the expectation was that the stock would return to 4 dollars within a short period. A few other stocks, AMC theaters and Blackberry, also were caught up in this mania.
My Investing Style, Slow and Steady
Now for those who have not been reading long, I am an index investor. I hold a large portfolio as I am financially independent although not to my retirement target financial number. I also firmly believe that trading on emotion leads to bad results, something studies support.
My Play Portfolio
However, I have also always been clear I hold a play portfolio. Essentially a small number of funds invested in individual stocks that I feel will outperform. Usually these are long term bets. This play portfolio for reference is less than half a percent of my assets. It doesn’t even show up in my asset allocation. More on that later.
That play portfolio is more of a psychological tool to keep me from playing with the large portfolio. I essentially have a segregated pot of money and that’s it. Typically it under performs the rest of my portfolio by a wide margin. Which brings us to the mania stocks.
Waking up to the Mania
I first got wind of what was going on with GameStop on Monday January 25th. At the time GameStop was priced at 65 dollars and still on an upward trend. I watched the stock through Thursday of that week before getting a bit of remorse that I did not jump in earlier. I could have increased that 65 dollar per share to 300 something. So I decided to do something about it.
No I didn’t buy GameStop. Inherently I understood it would shoot up and shoot down quickly. Without information on exact short positions I knew there would be little to no warning on momentum would change. At 3xx a share run up from 4 dollars, that was a game <pun intended> I was not prepared to play.
The Other Meme Stocks: AMC and BB
So I looked at the other mania stocks. Significantly below their first run up they had much less limited downside. AMC at the time was at 12 dollars. If I assumed worst case scenario it fell to 3-4 dollars a share, which is my assumption of intrinsic value now that the company was bailed out by this mania, the potential down side was no more then 2/3 of the investment. Perhaps the mania would continue to spike this company’s value.
Blackberry at the time was 17 dollars. Again based on my own intrinsic analysis I suspected a value between 10-12 dollars. So only a 1/3 of my investment at risk, weighed against a potential for significant upside if the mania of these meme stocks continued.
Investing .2% of My Portfolio in Mania Stocks
So I bought shares. Not much mind you. I didn’t use my whole play portfolio so I would estimate combined they represented .2% of my portfolio. Teeny Tiny.
We will pause here to diverge for a second. Why such a small investment? Frankly you should never invest in what was clearly speculation with more money then you are willing to lose. Those people that bought GameStop at 300-400 and hung on now have lost 3/4 or more of what they invested in a week. If you bought with a large portion of your account you could see your hard work from years go up in smoke in a week. No thank you. Meanwhile, had either stock gone to 0 I could sleep well at night. Again more on that later.
Refresh, Stare at Screen, Refresh
So I bought these small amounts of stock and I began to watch them on my computer. Refreshing about everything 10 minutes to see their prices… Not a healthy way to spend my day.
2 days later I began to get nervous about AMC as I saw a recession in short interest and sentiment about the stock begin to disappear in the media. So I sold it for a 7% profit. I sold a bit early frankly, I could have made 20% at the later run up. Then again that stock is now significantly down so my instincts were fairly good about bailing.
I held Blackberry meanwhile for a whole week. Eventually giving up and selling with a nominal loss of a few hundred dollars. The stock had settled in my intrinsic value range so I did not expect it would lose anymore. I guess there was still a chance it could have risen on the mania, but there was another push that led me to sell. A much stronger reason and learning from this whole affair.
Chasing Mania is Not a Healthy Way To Spend My Time
Let’s go back a paragraph or two. I noted I was refreshing these stock prices every 10 minutes. This type of hyper attention isn’t healthy. Worse still it’s not really productive…
You see if I invested less then .1% of my wealth in Blackberry then what was my best case scenario? The stock doubles and it’s .2%? A nearly impossible 10x move in Blackberry (BB) and I’d hit 1% of my portfolio.
Conversely the overall market daily moves are say 1-2% on a normal day. As I was checking BB on my trading platform of choice I couldn’t help but notice just that single portion of my portfolio balance held at this broker was moving every few hours multiples of my entire position in Blackberry. Here I was bending over backwards for a roll of the dice on a trivial amount. That’s when I realized the whole thing was just not worth it and sold the final position.
The Larger the Portfolio, the Less Value in Taking a Speculative Bet
So I guess what I’m saying. There comes a point on your journey to Financial independence when mania stocks are just not worth your time. You’d be a fool to take a large position in them. And it’s a waste of your time to take a small one. You are better off investing along with your standard risk tolerance.
Play Portfolio Lives On, But No Speculation
Now, I did not kill off my entire play portfolio. To be honest these are long term plays that I invested in some cases years ago. That also means they are not really speculative plays. But I did decide to back off wasting too much time determining where to move those funds instead. The money from Blackberry and AMC went right into a total market index fund.
Other then follow the general story to it’s conclusion as a student of the market, I have stopped watching individual stock price movements again. Back to my normal habit of logging into my accounts once a quarter to evaluate any rebalancing needs.
Did you invest in any of the mania stocks? Was it worth the effort?
it surprises me the number of long time finance writers who participated in the folly. something i’ll be reminding my readers of is what you said about such a small amount not even moving the needle. it’s a delicate balance between taking a starting position that can have an impact if the stock does well and not risking too much to start. i try and start small but add to winners in somewhat equal bites. that “all in” kind of stuff is not for me and i suspect not for you. smart move keeping a play fund just to keep your interest. ours used to be smaller but now individual stocks make up about 60% of our assets.
Different investment paths for different people. So long as it’s diversified and works for you…
I’m not surprised at all at the number for people in the fire community that jumped in. Intellectual understanding does not trump the psychology of Fomo.
Yeah! Jumping in and getting your feet wet FTF! Hahaha.
The GME saga reminds me of the old “shoe shine boy.” My wife is a dental assistant (she cares nothing about finance), and she asked me about GME the other day because all of the dentists and hygienists at her work got Robinhood and are asking about it… hahaha. When my wife asks me about stocks, I know shit is about to hit the fan. Hahahaha.
But, there’s always the fun factor that you took a shot at.
Great dopamine hit. Kind of like dropping a few hundred on mindless entertainment when you are up. When you are down though it can be stressful.
If I quit while I was ahead after the first day of AMC, BB, BBBY & NOK I would have had some nice gains around $4k, but naturally I held on, bought a few more meme stocks, and lost all of those gains and a few hundred bucks to boot haha. The experience ranged from fun to “what the hell am?” I doing to “never again,” and then back to “well maybe…” Definitely not worth the time, and as I had just written before jumping in anyway, I’m not putting a significant enough portion of my money at these for them to make a real difference anyway, and the losses hurt the ego more than the gains help the portfolio.
So very true on the last part. Ego hurts more then the money when its so insignificant.. I wasted how much time doing what?
I’ve put a few bucks towards a few of these. I feel like these lotto ticket gambles never work out for me though. I always have a tendency to buy at the top.
Seems like the company insiders take the other side of the trade and start cashing out either their own personal shares or with a secondary offering. There’s almost no way to win if you hold longer than a week or two. It becomes a game of buying anything being pushed by pump & dumpers just to be first before everyone else jumps in. Same thing happened in 1999 with the message-boards.
Now that I have started to put a few bucks towards crypto bubbles, surely this is the top for that market. 😉
I always hit the top too. Not to mention how stressful it can be. Good luck with the moonshot.